Arvind Subramanian has likened the current economic situation to a “pralay (deluge)”, in which the government should spend more than even what it ought to in a rainy day. India, the former chief economic adviser said at an e-Adda event hosted by this newspaper, must plan for a “substantially negative” growth this year that might require an additional fiscal expenditure of Rs 10 lakh crore. He has a point. Corporate indebtedness was already high before the lockdown. Not only will insolvency cases mount further, but even companies facing no significant cash flow issues wouldn’t invest in an uncertain public health as well as demand-constrained environment. Banks, too, aren’t going to lend, no matter how much liquidity the Reserve Bank of India (RBI) may infuse. The burden of non-performing assets, which is set to get heavier in the coming months, makes it impossible for them to finance an economic recovery. Last, but not the least, are households. Faced with layoffs and pay cuts, they would rather save and will be afraid to spend.
Under the circumstances, the onus for ensuring that the wheels of the economy start moving — there’s no guarantee of it happening even with all lockdown restrictions being lifted — lies on the government. Without somebody to spend, the economy is in real danger of contraction, which will, in turn, worsen the problem of businesses going bust, joblessness and loan defaults that can spread to the entire financial services industry. The one consolation today is that India is not saddled with its traditional “3F” constraints — food, fuel and foreign exchange — which were triggers for inflation and balance of payments crises. On the contrary, public foodgrain stocks are at an all-time-high, global oil prices have crashed and there is no run on the rupee, unlike during the “taper tantrum” period of May-August 2013. The risks, if at all, are tilted more towards demand-side “deflationary shocks”, as Subramanian puts it, than supply-side inflation concerns.
There is a legitimate question, though: If the government has to take up the slack, where will the money for it come from? The finances of both the Centre and states are in a mess, with receipts from tax and non-tax sources hardly covering even existing expenditures. But governments enjoy sovereign borrowing powers that allow fund-raising at rates below that of triple A-rated instruments issued by private corporates, more so in the present risk-averse scenario. Also, there is the option of deficit financing (“printing money”) through the RBI subscribing to primary auctions of government securities. There are, of course, costs in such powers being exercised. Past precedents — whether the issuance of ad hoc Treasury Bills to the RBI prior to April 1997 or the stimulus package post the 2008 global financial crisis — do not inspire confidence. This is the time to design clear rules for departure from accepted norms of fiscal prudence. Any stimulus has to be transparent and time-bound.